(Bloomberg) -- Morgan Stanley (NYSE:MS), which recommended selling U.S. tech stocks a month ago, says traders are finally starting to take heed.
The Nasdaq Composite has lost as much as 4.2 percent since reaching a record high on July 25 as investors fled the likes of Facebook Inc (NASDAQ:FB)., Twitter Inc (NYSE:TWTR). and Netflix Inc (NASDAQ:NFLX). following disappointing earnings. And while Apple Inc (NASDAQ:AAPL). breached the historic $1 trillion value mark last week, Morgan Stanley warns that this could actually be a signal of the rally in tech reaching a top, posing risks for the broader market.
“When we made the call, feedback was fairly lopsided against us. Phones were not ringing and even those who had sympathy for our views of a poor near-term risk reward in tech could only muster an ‘I see your points, but ... good luck,’ ” Morgan Stanley strategists led by Michael J. Wilson said in a note. “Given recent moves lower in parts of tech and challenges to growth and momentum, our inbound has picked up considerably as investors consider these risks.”
The bank’s strategists are sticking with their underweight U.S. tech recommendation, citing lower earnings revisions in some parts of the sector, continued leadership of defensives, as well as the fact that fewer stocks are now spurring the market gains.
The main thrust of their bear call is that the nascent selloff in tech -- which at 26 percent has the highest weighting in the S&P 500 Index -- will likely mark the beginning of a bigger drop in U.S. stocks. Morgan Stanley warned last week that the U.S. equity slump is just starting and that growth stocks-focused portfolios could especially get hurt.
“If we are right, and tech gets its turn on the volatility roller coaster, its market weighting, crowded positioning and overweight in growth and momentum strategies mean the pain will likely spread beyond just the tech sector,” Morgan Stanley strategists wrote.